Local Labor Market Effects of Plant Openings, New Colleges and Local Public Spending
Many private and public investments have regional consequences, e.g. by attracting new firms to a region. Building on our earlier work in the network program, our project studies three such place-based investments: the opening of a large “flagship” plant, the establishment of a new college and local public spending. The overarching goal of our project is to investigate the potential spillover effects of such investments in the context of the German labor market. Our empirical analysis relies on data from the German social security records and the CADAL project to draw a sample of employees in each region and follow them over time.
Building on our earlier work, our empirical strategy combines a difference-in-difference approach with an event-study approach. We first match for each treatment district a “control” district that in years prior to the event was similar to the treatment district in terms of the demographic and industry structure. We then compare in the second step outcomes in treatment and control districts in the years after the event took place. To analyze the local spillover effects of local public spending, we use updates in population counts after the 1986 Census which result in adjustments of transfers within the municipal fiscal equalization scheme as instrument for local public spending. The second-stage estimation then relates local public spending to labor market outcomes.
Our analysis seeks to answer the following questions: 1) Do local investments, through massive job creation, a new college or local public spending, create additional jobs and raise wages in the local labor market; and if so, in which sectors? 2) How do these local investments influence the mobility of workers in and out of the region? 3) Do these investments spur innovation and attract new businesses to the region?
Our research will make three contributions. First, governments often spend considerable sums of money to attract large “flagship” firms or establish new colleges, often motivated by the idea of agglomeration and local multiplier effects. Our research will shed light on the existence and magnitude of such spillover effects. In particular, we can contrast possible spillover effects from negative shocks (i.e., mass layoffs) with those from positive shocks (i.e., plant openings); and from private investments (i.e., plant openings) with those from public investments (i.e., college openings). Second, we distinguish between jobs and workers and analyze how local economies adjust to shocks which are an important step in understanding whether plant openings, for example, create jobs not only at the local but also at the national level. Finally, the results of our research have important policy implications. Our research will shed some light on the question whether these policy instruments are effective in spurring local growth and innovation, and thus potentially reduce regional disparities.